The election might have been won or lost on the price of eggs, but beyond inflation, there are other reasons your grocery bill is so high. Jesse Newman is a reporter for The Wall Street Journal, and she joins host Krys Boyd to discuss the middleman between producers and supermarket shelves – grocery distribution companies – the razor-thin margins the industry operates on even as prices rise for the consumer, and how everything we eat is brokered by these distributors. Her article is “The Mysterious Fees Inflating Your Grocery Bill.”
The lucrative side of the grocery business
By Madelyn Walton, Think Intern
With the holiday season right around the corner, consumers are stocking up on holiday goods. Top grocery chains such as Walmart, Albertsons, and H-E-B tend to have everything you need but how do they get their goods? And more importantly, why are your favorite ingredients more expensive than usual?
Jesse Newman is a reporter for the Wall Street Journal. She joined host Krys Boyd to talk about the rise in grocery prices, the role of distributors, and the process to keep your favorite foods on the shelves. Her article is “The Mysterious Fees Inflating Your Grocery Bill.”
“Distributors are the middlemen of the grocery business. They buy products from food makers—many of them too small to run their own distribution networks—then store, sell and ship them to supermarkets,” she says.
Recently, grocery prices have gone up due to added fees it takes to make your favorite goods, and the process of shipping them.
“Launching a new flavor for an existing product? There’s a fee for that. Running a promotion at retail? Distributors charge for that, too,” she says. “If distributors buy too much and products expire before hitting store shelves, they can deduct spoilage fees.”
Because of this, smaller food makers have increased their prices to stay afloat.
“Food executives said grocers have enormous power to dictate terms with distributors, and that small food companies can be naive about the costs involved in building a brand and getting it to store shelves,” Newman says.
Food distributors create a competitive environment by bidding against one another to be the main supplier for a specific chain.
“Distributors’ rules and charges are a symptom of pressures rippling through the supply chain, according to current and former grocery and distribution executives,” she says.
When distributors deduct fees from food makers, they are forced to raise their prices to stay in business. One spice seasoning manufacturer told Newman about how fees from distributors resulted in her contemplating selling her company.
“She let most of her 22 employees go when she was unable to make payroll last year, and spent months packing boxes of spice packets herself,” Newman says.
For many consumers, the idea of going to the grocery store and spending $200 can seem grueling, but the process to get ingredients on the shelf costs a lot more.
“Deduction busters can cost food companies thousands of dollars a month, food executives said,” says Newman. “That expense, like others, gets built into the prices that consumers see on store shelves.”
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Transcript
Krys Boyd [00:00:00] We’ve all felt the rising cost of groceries over the past couple of years. And depending on where we’re situated economically, those higher costs can trigger frustration or downright anxiety. When we see prices edging up on our favorite products, we might wonder whether the pinch is happening at the producer level. The companies that make the goods we eat, or whether supermarkets are responsible for the fact that, say, $100 trip to the store no longer fills as much of the cart as it once did. The true story, though, may lie somewhere in between. From KERA in Dallas, this is Think. I’m Krys Boyd. Distributors are an easily overlooked but absolutely essential link in the food supply chain we rely on. They have a significant effect on how much food makers get paid for their products and how much food sellers have to charge in order to make a profit. And while distributors do contribute to how much we all have to pay for what we eat, they themselves operate on razor thin margins. And at the moment they are feeling the pressure of prices too. Jesse Newman is a food reporter at the Wall Street Journal, which published her article, “The Mysterious Fees Inflating Your Grocery Bill.” Jesse, welcome to Think.
Jesse Newman [00:01:09] Thanks for having me.
Krys Boyd [00:01:10] You start us out by considering the cost of this certain brand of granola that they sell at Whole Foods, which increased last year, I think from $5.99 to $6.69, which comes out to something like an 11% spike. But the company that makes the stuff says it’s not taking a bigger profit. Why is it charging more?
Jesse Newman [00:01:30] So like everything. The answer to that is not simple. It is charging more for a variety of reasons, many of which your listeners may have heard about already. So things like raw ingredients cost more fuel and transportation and labor. All of this, all of this costs it’s costing more. And so that is part of the increase. But another part of the increase is that it’s much more sort of hidden, little understood. So the world of grocery distributors and grocery distributors are this really important link in the supply chain that shoppers just don’t tend to think about. When we go to the grocery store and they’re sort of the driver of getting food from a lot of particularly smaller manufacturers to grocery shelves. So they’re sort of think of them as the middlemen of the grocery industry. And the way that they work is also, in some cases, for, again, typically smaller food manufacturers. They charge all sorts of fees and charges and deductions and chargebacks. The way that they work is also, according to smaller manufacturers, driving up their costs.
Krys Boyd [00:02:41] It occurred to me, Jesse, reading your article, that it is so easy for us as consumers, especially in the U.S., to just take for granted that pretty much anything we want to buy to eat can be found in an average supermarket. We are like stunned if our favorite store is out of our favorite sauce or canned item because it so rarely happens. How do distributors help produce that kind of seamless shopping experience?
Jesse Newman [00:03:05] You’re right. And not only that, you must think about what kind of variety we haven’t purchased, right? So we just go in there and it just seems like a miracle of modern, modern grocery shopping that there’s so there’s so much variety. There’s such a vast array on shelves. And so grocery distributors are really are really responsible for some of that. So, for example, if you think about your grocery store, a grocery store, you know, they’ve got the they’ve got their loading docks in the back and they could not have all of these, you know, thousands and thousands and thousands of products that line the shelves arriving in their own trucks, you know, at the back, at the back of their doors. It’s just it would be it would not be an efficient process. And at the same time, you have a lot of smaller manufacturers that, you know, they don’t run their own trucking fleets. They’re too small. They need that distribution to the manufacturer needs distribution. And then the grocers themselves often rely on these third party distributors. You know, I should say that a lot of the big supermarket chains, they handle much of their own distribution. So they have their own warehouses that brands can then come and drop off their products at those warehouses. But for certain stores, you know, they don’t even run their own warehouses. And so these third party manufacturers, these third party distributors are responsible for for getting purchasing the product from manufacturers, storing it, warehousing it in some way. They’re like in some ways they’re like consolidators. And oftentimes they’re curating they’re taking you know, they’re taking thousands of these products from their warehouse, picking thousands of the products, curating a truck and then and then bringing those products to the grocery store. So they are a large part of the reason that we all have as much choice as we do.
Krys Boyd [00:04:50] So distributors, do distributors play a role in grocery stores deciding that they’re going to pick up a new brand of something that they haven’t carried before. Or does that brand typically make its own deal with the grocery store and then have to work out how to get it there with a distributor?
Jesse Newman [00:05:07] It’s a great question. I think, you know, this works a lot of different ways. But typically, what if you are a small you know, if you’re a smaller brand and you think in this case, you know, we were talking about in the story a new grocery I’m sorry, a new granola, a new granola variety. If you are a small brand and you think, you know, your product would really drive with, in this case, Whole Foods consumers, you might go to Whole Foods and say, hey, look, I’ve got this product that I think is would really fit on your shelves. And then if the grocer is interested, you know, and if you are a smaller brand and if they have a relationship with the distributor, the grocer might say, you know, let’s try it out. Go talk to in this case, with Whole Foods, it would be you. And if I go talk to the distributor, you know, get signed up with them and then we’ll work to get your product in our stores. So, you know, it is oftentimes the manufacturer will strike up a relationship with the retailer. But it is it very quickly becomes a situation in which you also have to have a relationship with the distributor.
Krys Boyd [00:06:08] So distributors play a role in whether small food producers ever get that big break to national or even regional availability of their products in stores.
Jesse Newman [00:06:18] That’s right. In their defense, distributors will say, hey, you know, we helped put these guys on the map. You know, these if you want to be if you want to be distributed nationally, you we are the we are your routes to grocery store shelves. And and that’s and that’s right. For the most part. So, you know, it’s they they really the two parties really need each other.
Krys Boyd [00:06:41] Are there a lot of companies distributing at the national scale, you know, to the contiguous 50 states?
Jesse Newman [00:06:50] There are very few distributors, third party distributors that work at a national level. There are very what I would just have is a very small handful. So, you know, particularly if you are in the organic natural specialty market, there’s really two distributors. There’s a third that deals with more conventional products. But that’s that’s about it. If you are a brand and you are looking to be distributed nationally, you have very few options for how to go about doing that.
Krys Boyd [00:07:20] Right after reading your article, I spotted a KeHE truck in my neighborhood, and I’ve maybe seen them before, but never really registered their presence. Do these companies both collect food from sellers and deliver it from retailers like. Well, you just sort of walk us through the job of a food distributor.
Jesse Newman [00:07:39] Yeah. So it it depends. It depends a little on what your brand is and the relationship that you have. The distributor. Again, this can work a variety of different ways. But yes, a distributor, it is like I said, they’re sort of the middlemen. They’re the consolidators. So they either collect or in some cases receive food from manufacturers. They store it in their warehouses, and then they assemble a curate, a collection of goods on a truck. So, you know, again, they take from thousands and thousands of different manufacturers and they collect all the goods on a truck and they then truck that food to a to a grocery store or to a grocery store warehouse. And so, you know, a small manufacturer, if the distributor isn’t collecting, I mean, then they are, you know, a small manufacturer might use might use some sort of, you know, mail delivery service to get their goods to the distributors warehouse. But essentially, the distributor is taking in all kinds of different products, sorting it and delivering it to the grocery store.
Krys Boyd [00:08:48] And distributors generally deal in items that have to be refrigerated or frozen, as well as in shelf stable goods.
Jesse Newman [00:08:55] Yeah, it depends. It depends on the distributor and what they specialize in. But a lot of this is going to be your packaged products sort of in the center aisle of the grocery store. But it also could be some yogurts and some cheeses and some frozen meals. So it really runs the gamut.
Krys Boyd [00:09:10] So I have no head for logistics, and yet I find it to be a really interesting line of work. These companies have to manage timely turnover, right? They’re taking all this stuff into their warehouses, whether these are shelf stable products or products that need to be refrigerated or frozen, they’ve got to move them out to places that can sell them in time for them to be sold before they go bad.
Jesse Newman [00:09:34] That’s right. And they also are estimating what demand is going to be like. Right? So when they purchase from from a manufacturer, they are you know, they don’t have a guaranteed sale to a retailer. So they are trying to figure out what set what their sales will be like and what different different retailers will want of a certain product. So there’s a lot of, you know, they they they take on a lot of risk themselves in being that middleman.
Krys Boyd [00:10:02] What happens if a distributor has product from a food manufacturer that goes bad before it can be delivered to a grocer?
Jesse Newman [00:10:11] So this is a situation, you know, when we talk about the sorts of fees and charges that small manufacturers say are they just get walloped with firm distributors. This is a good example of the sort of Catch 22 that they find themselves in. So in some cases, you know, the manufacturers will say, if I you know, the distributor orders too much for me, and so I ship too much and it sits on their shelves or demand isn’t where we thought demand is and where the distributor thought it would be. They don’t sell as much as they thought they would. And the product goes bad in the distributors warehouse before it makes it to the grocery store. Then the distributor will often charge the manufacturer for what is called spoilage. It can charge a spoilage fee. And on the flip side, the smaller brands will explain that if you try if you short an order, if you don’t, if you feel as though the distributor has over ordered and you don’t send everything they’ve asked for, then the distributor will charge you for that too. So the brand feels as though in this case they are taking on all the risk because, you know, whether they spent too much and it spoils or too little, you know, they’re held accountable.
Krys Boyd [00:11:28] So distributors don’t actually work for food producers, right? They buy products from them.
Jesse Newman [00:11:36] That’s right.
Krys Boyd [00:11:37] It would seem to put the food producers in this position to charge whatever amount they think is appropriate. Why don’t distributors always end up paying the full price for the food that they then resell to grocers at whatever price they set?
Jesse Newman [00:11:51] So where it gets complicated, you would think that in sort of a pure wholesale model that the distributor is able to charge both what they have, that they are able to charge their customer, the grocer, the retailer, the full amount that they have paid the manufacturer, plus whatever they need in order to account for all of their costs, their their overhead and all the costs just to run their business. But in fact, where it gets complicated is that a lot of the distributors have entered into what are called cost plus contracts with they’re with retailers and these cost plus contracts. They limit how much the distributor can markup their product from the price that they paid the manufacturer. So essentially they limit how much they’re able to charge the retailer. And over the years, what has happened is that these contracts for with a lot of big retailers, the contracts have become very favorable to the retailer. And so the cost plus that cost plus figure is very small. So a distributor might be able to charge you no cost plus 6% cost plus 8%. But it doesn’t it isn’t enough for the distributor to make the money that they need to on the sale to their customers. So essentially, one way to think about it is that on each of these sales, the distributor, you know, can be losing money on the sales. And that is the reason that they have to turn around and then charge what is known as inside income. They have to turn around and charge the manufacturer in order to cover all their costs.
Krys Boyd [00:13:32] Yeah. And for some of these companies, inside income is like a significant percentage of their annual revenue.
Jesse Newman [00:13:38] That’s right. It was explained to me that these distributors, I mean, they just they they they would not stay in business were it not for inside income.
Krys Boyd [00:13:45] Jesse, how is it that distributors byproducts outright from food producers but then hold producers accountable for spoilage? That happens after the distributor takes delivery. That that seems unfair.
Jesse Newman [00:14:00] Yeah, well, I think a lot of the manufacturers would agree with you, you know, but the distributors say that they again, there’s a lot of risk in being the middleman who is responsible for sort of buying the products from manufacturers and holding them, holding them before they are sold to the retailer. And so, you know, they say that they need to they need to be able to, you know, spread out that that risk and cover their costs with which involves an incredible amount of logistics and incredible amount of coordination of buying and selling products and estimating demand. So, you know, it is it is, you know, part of what they see as the service that they provide, that they you know, they think they feel it is entirely fair of them to also charge the manufacturer for, you know, to involve the manufacturer in some of that risk.
Krys Boyd [00:14:54] So food producers told you it can be really hard for them to know in advance how much money they will actually receive for the products that they sell to distributors. Give us some examples of how that might work.
Jesse Newman [00:15:07] That’s right. So, you know what will happen is that a distributor will will purchase a certain amount of product. And but then on the you know, as as time goes on, on the checks that distributors send to manufacturers. So sort of accompanied with the check stub, there will be a you know, there can be dozens and dozens of what are referred to in the industry as deductions, deductions for different for different alleged infractions or just charges that the distributor or the or from the distributor or that the distributor is passing on from the grocer. And so all of that, you know, there are these lists of of sort long numbers that are pretty meaningless unless you go and look up what they what they actually refer to. But all of these take off, you know, just it can be a large amount or a small amount, but it it takes off sums from what the distributors owe to the manufacturer. And that can in some cases, it can leave the manufacturer owing the distributors money. They can be the deductions can be that significant, that either they get just a fraction of the income that they were expecting or in fact, they wind up owing the distributor.
Krys Boyd [00:16:21] That has to be very painful for a food manufacturer.
Jesse Newman [00:16:25] Yes, it is. And you know, what the distributors will say is that, you know, look, all of this is laid out in their contracts with the manufacturer and that small brands can be headed by really incredible visionaries when it comes to food entrepreneurs and creators. But that these are not necessarily the people who are reading the fine print in their contracts and that some of them can be really naive about what it costs, just what the system costs and how much it costs to get the product from point A to point B. And so, you know, they kind of point point the finger back at the manufacturers and say, you know, many of them, many of them just don’t know what it entails to be in business. But the manufacturers, a lot of manufacturers will say it isn’t quite so simple. You know, it is when you’re reading through these contracts, it isn’t at all clear how a lot of these fees and charges, just to the extent that they are going to to impact you. For example, we talked to a brand who mentioned that he received a he received a payment from his distributor that did, in fact, pass on two $2 charges from the retailer that they worked with. And then the distributor tacked on to each of the $2 charges from the grocer two $40 administrative fees. So essentially charging $80 in administrative fees to pass on the $4 from the retailer. So while you may read in your contract with the distributor that, you know, there will be an administrative an administrative fee tacked on to grocery grocery fees, you may not understand just how that plays out now. You know, $40 or $40, there is not the end of the world that you can imagine how this racks up for manufacturers and and can be can be pretty debilitating.
Krys Boyd [00:18:26] What is the relationship financially between distributors and grocers like? Do distributors feel that they are getting squeezed by grocers in the same way that manufacturers feel they’re getting squeezed by distributors?
Jesse Newman [00:18:38] Yeah, it’s a great question. And, you know, I had multiple people tell me during the course of this reporting that that, you know, all the all of this all of this just runs downhill. The pressure sort of runs downhill. And it’s like everybody, everybody in the supply chain putting out putting the next guy in of ice. So, yeah, distributors will say that they operate on razor thin profit margins for themselves and that they in fact are squeezed by retailers, by the grocers who are trying to keep their own costs low. And that this has gotten you know, there’s a sense that this has gotten more extreme over time, not not in no small part, because you’ve got big CPG companies that are raising their own prices. And so grocers are trying to you know, the grocers are having to try to figure out how to keep food affordable for their customers. And these costs plus contracts that they have with distributors are one way that they can limit their exposure.
Krys Boyd [00:19:40] What role do distributors play in charging food companies for grocery store assets like premium shelf placement or special promotions or coupons?
Jesse Newman [00:19:51] So, you know, we talked to KeHE, and KeHE is one distributor that said, you know, the majority of the fees and charges that we assess onto manufacturers are actually coming from the grocer. They’re they’re stemming they are originating at the grocery. Exactly that type of thing. You know, this is this is fees for shelf space or fees for fees for promotions and discounts and at but that at the same time, you know, they said we operate like a bank. We’re just passing on these charges. But as we all know, banks make a lot of money. And and in the same way, you know, the example that I described with a $40 administrative fee tacked on to the $2 grocery fee, you know, it’s kind of a double whammy when you’re the manufacturer and you’re at the mercy of both the charge from the grocer and also a charge from the distributor as well.
Krys Boyd [00:20:42] So I have to tell you, Jesse, I was reading along in this piece initially convinced that food distributors were running some like, uniquely unfair operation that squeezes producers on one end and grocers on the other with us consumers really paying the price in the end? It really is not that simple, is it?
Jesse Newman [00:20:59] It really, it really isn’t. You know, the the way I have come to think about it is that you have this entire industry, the food industry, most companies this is and obviously there are there are you know, there are outliers. But a lot of these companies are operating on pretty thin profit margins. And it is really this struggle between them in this kind of tug of war between them to, you know, to to get your to get your piece of that margin. And so whereas the distributors can be can feel like the companies that are really squeezing the manufacturers, when you look at the whole situation, a lot of the pressure is coming from grocers and then it and then, you know, it goes back to the big food companies as well. So it’s really just a symptom, I think, of the struggle for profit in the American grocery business.
Krys Boyd [00:21:58] What are distributors biggest expenses? The things they have to pay money for and they have to pay whatever the market is charging.
Jesse Newman [00:22:06] So you can think about transportation costs, you can think about fuel costs, labor. I mean, these are things and, you know, think about when I describe the cost plus contracts. So these contracts can be long standing. So you and I just signed a new contract with Whole Foods to be their primary distributor until 2032, I believe. And their cost plus that cost plus model. That cost plus is going to stay the same for the next to the next number of that number of years, almost decade. And so as labor costs go up, as, you know, a fuel costs go up, distributors are really limited in where they can how they can make up the additional the additional expenses that they’re dealing with. They have really limited flexibility in those cost plus contracts. So, you know, it’s there’s so those costs that they have, you know, for for fuel, for labor, it can be really hard for them to make up for higher costs.
Krys Boyd [00:23:15] So it’s a little bit like when airlines lock in fuel prices for the foreseeable future. That can turn out really well for them. If prices go up, it can turn out really poorly if fuel prices go down. But they’re stuck.
Jesse Newman [00:23:27] Yeah. And labor is another big one. You know, if they when they are having to, to increase their, their wages, it’s not as though they can necessarily just turn around and offset that with their customers.
Krys Boyd [00:23:38] I have to say it seems as if this distributor producer relationship might be susceptible to like payola or distributors playing favorites. There is only so much room in a warehouse on trucks, etc. on grocery shelves. Are there any guidelines in place to at least ensure a level playing field for different food companies working with these distributor?
Jesse Newman [00:24:00] There are really very few rules in this relationship. I mean, a lot of people will describe it as sort of a pay to play system. And and, you know, that there’s a whole there’s a whole sort of cottage industry of companies that has grown up in order to help manufacturers, you know, sort of fight some of these deductions and claw back some of their income. But food companies are also really, really wary of going to battle with their with their distributors because they are you know, they are the only route to the grocery. Many times the only route to the grocery shelves. And so manufacturers, you know, can be pretty can be pretty concerned about retribution if they cross their distributor.
Krys Boyd [00:24:45] Yeah. I mean, for small scale food producers, there’s not a really reasonable workaround, right? Like sending batches of food through shippers like UPS to thousands of stores all over the country. That would be prohibitively expensive even compared with whatever they’re having to pay with distributors.
Jesse Newman [00:25:04] Absolutely.
Krys Boyd [00:25:05] So this story also made me think about the fact that lots and lots of food companies that may or may not be easy to find in grocery stores now have these websites that sell direct. When I first started noticing these popping up, I thought, this can’t really be a great business model, but I’m starting to realize that maybe these companies can make up a little revenue by selling direct to consumers if their products are conducive to that.
Jesse Newman [00:25:31] It’s definitely something that they’re trying. So I had I had numerous friends tell me, you know, we are rolling out this new product, but we’re at least for starters, we are starting by going direct to consumers so that we do not have to, you know, so that we can keep it away from distributors. We don’t have to deal with that with that relationship and the same with grocers and see how this product does and and kind of figure out the right price point for it. And then at the same time, you know, they’re also assessing what they need to add on to their prices in order to in order to remain profitable or or be profit, get profitable in the distribution in the distribution system. And so a lot of companies will will start out direct to consumer and see if that is a better route for them.
Krys Boyd [00:26:14] It also occurs to me that, you know, you can start out really excited about producing some new product that you’ve come up with in your kitchen or your garage or something and think you have worked out all the costs without fully understanding what’s coming in your relationship with distributors. Like you can think that you know exactly what it costs to make and bottle your hot sauce or whatever, and then how much grocers could charge for it. And forget in the early planning stages about the cost of distribution, which can be significant.
Jesse Newman [00:26:45] I think that lack of transparency is a huge part of the problem. So I think you’re absolutely right. I think a lot of brands really have no idea what they’re getting into. Even once they’ve read the contract, their contracts with the distributors. And so they are not pricing their products accordingly, which is why they then have to raise raise their prices when they see just how all this all this plays out. And a lot of producers said to me that if they if these costs were more transparent, if they were less obscure, then they would have a better sense of what they would have to charge. And, you know, some amount of this is producers charging more as a cushion because they’re not sure what they’re going to make from month to month. And so they’re raising their prices to be sure that they’re covered. And so I think I think everyone would probably benefit from more transparency.
Krys Boyd [00:27:37] As you mentioned, I mean, these fee and compensation structures for food distributors are laid out in some initial contract with food producers. But food producers are often still surprised by their deals with distributors, some of them actually what hire people to try and push back on these surprise fees.
Jesse Newman [00:27:55] Yeah. So, you know, the companies will say that the deductions that they receive are so burdensome and they’re so opaque that you need sort of a small army of people to be looking at them and trying to understand what they are, trying to understand what they are. For so many companies, once they get to that point, many companies will hire a full time employee, you know, to go through these deductions and understand what they’re for, figure out which are legitimate, figure out which they think are in error or egregious, and and then go back to the distributor and try to recoup some of those costs. Others don’t don’t have the resources to hire a full time employee. And so for them, there is this sort of cottage industry of what are called deduction management firms or that do deduction firms that do deduction management. And you can as a as a food manufacturer, you can hire one of these deduction management firms which are sort of colloquially colloquially known as deduction busters. You can hire these firms to do that work for you to try to understand, analyze all of the deductions again and figure out which ones are legit and which ones are erroneous or egregious, and then go back to the go back to the distributor and try to find them and claw back some of that income.
Krys Boyd [00:29:18] How does it happen that distributors sometimes require discounts on products from producers? Like I’d love to require a discount the next time I go to buy something, but it doesn’t usually work out that way.
Jesse Newman [00:29:29] Yeah, some of that comes from distributors and some of that comes from retailers. I mean, it is the it’s sort of understood as the cost of doing business that if you are a small brand, you’re trying to get in front of, you know, you’re trying to get in front of consumers, you’re trying to get consumers away from, you know, whatever. The bigger, you know, the big or longstanding brand might be. And so, you know, grocers will say, well, the way to do that is to offer a discount or offer a promotion. And so that can be required both by grocers and by the and even by the distributor.
Krys Boyd [00:30:01] Do distributors have any say in where products get located in stores or do they just drop off their trucks and go? Or do they recommend or require grocery stores to site things in certain spots?
Jesse Newman [00:30:14] I don’t think I don’t think that’s as much as their business. I mean, if you think about some of the companies, the big food companies that do their own distribution, do what’s called DSD direct store delivery, this would be, you know, some of your your big your big potato chip companies or your big soda companies. You’ll see you know, you’ll see folks who work for those food companies in the grocery stores, you know, working on the display, doing the delivery, working on the displays. But I don’t think that distributors really are in the business of, you know, doing an end cap arrangement just.
Krys Boyd [00:30:48] Now, just as you mentioned, that, you know, some big food companies like, you know, potato chip manufacturers send their own folks into grocery stores to set up displays, that sort of thing. We should remind folks again that like very, very big food corporations, they’ve got their own distribution networks, right? So they are not necessarily under the influence of these food distribution companies. They they have a kind of vertically integrated operation.
Jesse Newman [00:31:12] Yeah. And again, this is just such a complex space. It happens in all different kinds of ways. So if you a lot of the big food companies that do what is what are called like the high velocity products or the products that are just, you know, churning off the shelves. So soda chips, you know, a lot of these companies, PepsiCo is a good example. They will pay for those products or they’re Frito-Lay products. They will do their own direct store delivery and they will you know, they’ve got their own trucks. They’re delivering this stuff to stores themselves, you know, others. And then you’ve got the big retailers and a lot of the big retailers, you know, do a lot of their own distribution, meaning they have their own warehouses. And so food companies, the big food companies will come and drop off their product at those warehouses. And so there’s a lot of different models for how food is distributed. But, yes, a lot of food companies, a lot of the big food companies and a lot of the big retailers do their own distribution. So this is where these third party distributors come in is primarily for what are referred to as sort of what are smaller brands or the slower churn, lower sales volume items, which are, you know, which still all of us tend to have in our refrigerators or our pantries. But they aren’t quite, you know, they aren’t quite the they don’t quite have the same day to day, day to day consumption that some of these other products have. But that isn’t to say that isn’t to say that these even as even the big food makers I mean, even they can rely on these third party distributors for some of their for some of their smaller, more niche items.
Krys Boyd [00:32:55] Are certain kinds of foods may be more or less profitable for distributors to deal. Like do they make more reliable profits on shelf stable goods that can sit for some time before any concerns about freshness?
Jesse Newman [00:33:07] I think the way to think about it is sort of that those products entail, you know, less risk. I mean, if you are you know, if you’ve got a granola brand and it’s got a use by date, that’s months and months and months out versus a versus a yogurt, that is just a matter of weeks, then, you know, that can sit in the warehouse. And that just entails less risk than something that, you know, that something is that is refrigerated.
Krys Boyd [00:33:32] So ultimately, food distributors will pass their costs on to grocers. Grocers will pass these costs on to consumers. How do rising prices for certain products from smaller producers affect demand for those items like or whether groceries, grocers agree to carry them at all? There’s a limit to how much you can raise prices and still get people to buy a product.
Jesse Newman [00:33:55] That’s absolutely true. And that’s one of the that is certainly one of the calculations. So even for brands that I spoke to that didn’t raise their prices, you know, they were that that often is a decision that is really hurting them in terms of their own ability to to be profitable or simply to make payroll. But some of them are raising their prices because they feel like they or sufficiently because they feel like they can’t. So one of the brands in the story that I talked to, a woman who runs a spice manufacturer, you know, she explained to me that the distribution costs were so burdensome for her that grocery and distribution charges were so burdensome for her that she wound up raising her prices pretty significantly on her spice blends. And as a result, you know, she saw she saw her sales really take a hit. And so it was very damaging for her that she took this price increase. But she felt as though she had no choice in order to stay in business, given how burdensome these fees were
Krys Boyd [00:34:52] Yeah, All of this is helping to clarify why, for instance, you know, small niche products tend to cost more in the grocery store. They may not cost more to produce, you know, a spice blend from this manufacturer you talked about may cost the same as what McCormick spices, a big giant in the industry, is spending to produce products. But McCormick just has a bigger machine behind it and can conceivably keep prices lower.
Jesse Newman [00:35:19] Absolutely they are. They also have a lot more leverage with the retailer. Right? So there’s this like I was describing, there’s this kind of tug of war between the big food companies and retailers in terms of what prices should be and and who captures what what share of of any profit margin. And when you are a big company, you’ve got a lot with with powerful, you know, iconic beloved brands behind you have a lot more leverage than the little guy who is, you know, trying to get they’re trying to get their products on shelves. And it’s why, you know, as he pointed out to me, you know, they said that some something like they had a crazy statistic about how some 87% of small food brands, you know, will go out of business in a two year time span. So it’s a really brutal it’s a really brutal business. And distribution is is part of that equation.
Krys Boyd [00:36:07] How do food distributors compete with one another for business? I mean, these food producers don’t have to do business with any company that they feel is charging them more than they can afford.
Jesse Newman [00:36:18] Except that there are very few distributors and they have essentially the same rule. So one of the ways the distributors compete is through these cost plus contracts, and that’s one of the reasons that the contracts have become as favorable to the retailer as they have, because the main distributors, the 2 or 3 main distributors, will be competing with one another for this long term contract with a big retailer. And one of the ways that you could be successful is by limiting what you are going to be charging the grocer. So, you know, it’s a real these these contracts are a real challenge for the manufacturer because they’re used to win business from the grocer. And then if you are the primary distributor for a particular grocer, if you’re a brand, you really don’t have that many choices if you aren’t going to be working with that primary distributor. I mean, some of these stores have a secondary distributor, but it’s really the primary that they’re working with. So if you don’t like the way that any of the distributors are doing their business, you can opt out. But again, you just have few choices then and which is why they the brands will describe distributors as the gatekeepers to the grocery business who decide what gets on shelves and to some extent what it costs. And yet the distributors turn around and say, well, you know, we may be the gatekeepers, but we’re also, you know, we put these brands on the map. So we are the bridge rather than their gatekeeper.
Krys Boyd [00:37:50] Well, I think it’s interesting that the Federal Trade Commission recently blocked the merger of I believe it was Albertsons and Kroger, two very large grocery chains. The idea being that the more grocery store competition we have, the better it is for consumers. How is it that we still only have a small number of national grocery distributors?
Jesse Newman [00:38:10] I think that distributors, they’re not as front facing as the grocers are. So when you’re looking at questions of competition, you know, obviously Albertsons and these big mergers are going to be front and center in terms of what you are looking at. I mean, the distributors are just much smaller companies. So unifies the public companies. The others are KeHE and NCS are private companies. And they have there have been mergers over the years. The bigger distributors have absorbed smaller or regional distributors. But these aren’t names anyone has heard of, I mean, DPI or Monterrey. These are other names of distributors that were absorbed by the bigger ones. And, you know, these are not huge businesses. And so overall, it’s just a smaller piece of the pie. I don’t know that regulators really look at distribution and have thought, here’s a way we can really increase competition. But I will say, I tell you that, you know, some of the small manufacturers that I talk to are absolutely trying to put it on these radar.
Krys Boyd [00:39:09] Is it fair to say the consolidation in the distribution industry has made the industry more efficient?
Jesse Newman [00:39:15] I think what distributors would tell you or what KeHE said was that, you know, the deals that they have done have expanded their capacity and have expanded, you know, the types of products that they’re able to bring into their warehouses and then to get on store shelves. And certainly that given the competition in the industry, it has enabled them to stay afloat. And I think folks to who would defend the distribution model would say if they aren’t able to do these deals and they aren’t able to survive, if you go down to two distributors instead of 3 or 1 distributor instead of two, these brands would be pretty unhappy. You need multiple healthy distributors in order to make the system work, and fewer is not the answer. So I think that they view the consolidation or they view the deals that they’ve done, as, you know, as a positive for the brands. And, you know, I should say that there are other distributors who work regionally, who work locally, and, you know, they will say, hey, we’re here. If a brand, you know, isn’t quite ready to go national and they want to work with us like we’re worse for it, we’re willing to work with them. So it’s really a question for these brands for getting big enough that they want to be distributed nationally. And there’s other models that are popping up. There are other you know, there are sort of there are some challenger challenger distributors that are coming out of the woodwork and realizing that there’s a problem that needs to be solved.
Krys Boyd [00:40:40] During the recent presidential election Jesse, both candidates talked about promising to reduce grocery prices in particular. But after this conversation, I have to wonder, like how much power a president or the legislature or anybody has to affect what most of us pay for groceries day to day.
Jesse Newman [00:41:01] That is a great question. I think that they the federal government has a lot less power than perhaps today than perhaps they alluded to during the during the presidential campaign. You know. There are I think there are multiple levers that government can pull, one of which is just talking about these issues and having them be in the news. I mean, these companies are, you know, to some degree, they have to be responsive to consumer demand. But, you know, when it comes to like actually negotiating the price of the bag of granola, it’s it’s I think it’s a lot more limited than many people might think.
Krys Boyd [00:41:47] I think it’s still true that Americans broadly spend less on groceries as a share of our overall income than people in many other wealthy countries. I mean, we often talk about this being because we eat a lot of junky stuff that isn’t very good for us, but I wonder how our food distribution systems play into this, the fact that they’re not making a whole lot of money. Does food distribution help keep food less expensive or does it make food more expensive, or is it just it is what it is?
Jesse Newman [00:42:14] I think, you know, I think that would be interesting to compare sort of the European model distributors, I don’t believe are as much of a or as much of a feature of the food supply in Europe, for example. But you are right that in the US we, you know, a lot less of our disposable income goes to food than in other countries. And so, you know, there’s a number of reasons that there’s a number of reasons that that is the case. It certainly isn’t. The distribution is sort of a small part of it. But, you know, as we see through this story with, you know, with a kind of a subsection of products in the grocery store, distribution can be costly and it can be one of the reasons, you know, particularly in recent years, that food makers have been raising their food makers have been raising prices. But I think the question of. How know where consumers can find relief. And that is a bigger question that gets you honestly to a lot of the bigger food manufacturers. And that really doesn’t just lie with it certainly doesn’t just lie with distributors.
Krys Boyd [00:43:28] I’ve heard some financial experts saying that we will acclimatize to how much food costs now and stop thinking about how much it cost five years ago at some point. Do you have any forecast, though, for what might happen with grocery prices over the next few years if the economy remains relatively stable?
Jesse Newman [00:43:47] I mean, that is certainly what food meant. You know what the big public food manufacturers have said as well. They say that, you know, this is what history teaches us, right? That they that these prices go up and they do not come down because consumers adjust, because you go to the grocery store and you buy food multiple times a week or often multiple times a week. And, you know, you go once and you’re shocked by the price and you go a second time and you’re shocked by the price. And then the third time you just reset your understanding of what the price of that product is. Kind of like kind of like gas. At the same time, you know, they will also pretty freely say we just haven’t seen this level of inflation, you know, historically. And so, you know, I think it sort of remains to be seen, you know, the extent to which that is true. And we have absolutely seen consumers pushing back on these higher on these higher prices. I mean, now, you know, a lot of these same food companies are increasing the amount of discounts and promotions that they offer in order to bring consumers back to products that they have, you know, that they’ve walked away from because they’re just too expensive. So I think a lot is going to play out in the next couple of years. I mean, certainly with a new administration coming in that is going to have their their own policies that may may affect food prices as well.
Krys Boyd [00:45:12] Jesse Newman is a food reporter at The Wall Street Journal which published her article, “The Mysterious Fees Inflating Your Grocery Bill.” Jesse, I have learned so much. Thank you for the conversation.
Jesse Newman [00:45:22] Thank you.
Krys Boyd [00:45:23] Think is distributed by PRX, the public radio exchange. You can find us on Facebook and Instagram and wherever you get your podcasts by searching for KERA Think. If you want to go to our website, check out upcoming shows we’re planning, sign up for our free weekly newsletter that is think.kera.org. Again, I’m Krys Boyd. Thanks for listening. Have a great day.
